M&A in the Payments Sector: Key Legal, Regulatory and Contractual
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October 2020 M&A in the Payments Sector: Key Legal, Regulatory and Contractual Considerations Mergers and acquisitions involving companies in Accelerating Trend of Payments the payments industry have continued at a fast pace in 2020, with an increasing focus on Companies M&A payments solutions beyond traditional credit Several large capital raising rounds demonstrate cards and deposit accounts. The COVID-19 the strength of payments companies despite, and pandemic has served as an accelerator for digital partially because of, the COVID-19 environment. payments solutions, with a push toward Trends driving this growth include the changing contactless payments and digital solutions for needs of consumers, including the desire for those sheltering at home. The pandemic has also cashless payments, digital onboarding, paperless exposed fintech companies with less durable identity verification and modernized payments revenue models and may increase the sale of infrastructure. In April 2020, payments processor fintech businesses to incumbent bank acquirers. Stripe raised $600 million in a Series G preferred Many large banks are reacting to the pandemic stock capital raise with an enterprise value by prioritizing mobile channels and accelerating estimated at $36 billion. The progress in 2020 of their drive to digital transformation, and in many Marqeta the digital card issuing platform, is cases that decision may lead to acquisitions indicative. In May 2020, it raised $150 million with where the ability to build digital businesses an enterprise value estimated at $4.3 billion. In internally is viewed by incumbents as too slow July 2020, Marqeta partnered with JP Morgan 1 and cumbersome. The payments space in Chase to launch digital-only credit cards and, in particular has been viewed as a bright spot for October 2020, Marqeta and Mastercard fintech, with embedded payment solutions announced a global partnership. Throughout the (where payment innovations are embedded in the summer of 2020 rumors of a Marqeta IPO were end user experience of a non-financial business) reported.2 gaining traction. Technology companies, such as Facebook, Apple, Amazon and Google, are also Perhaps the best indication of the importance of investing in payments solutions. The growing digital payment solutions can be seen in the three importance of online payments processors, such large deals announced in 2020 by three of the as PayPal and Stripe, and embedded payments largest credit card networks, American Express, companies, such as Shopify, Instacart and Klarna, Visa and Mastercard. exemplify these trends. Visa/Plaid: In January 2020, Visa announced that working capital products to its small business it would acquire data aggregator Plaid, with a customers in the United States.6 Kabbage’s closing still pending as of the date of this article. lending portal unifies online bill payment, credit The consideration for the transaction totals $5.3 lines and cash flow management tools as well as billion, consisting of approximately $4.9 billion of a business checking account. American Express cash and $400 million of retention equity and did not purchase Kabbage’s pre-existing portfolio deferred equity consideration. This acquisition will of marketplace loans. American Express will allow Visa to continue expanding from its core benefit from the well-regarded fintech lending credit and debit network business into an technology held by Kabbage as well as its emerging fintech ecosystem. Prior to the technology talent in a market where human acquisition, Plaid successfully worked to allow resources are regarded as scarce. Kabbage’s consumers to connect their bank accounts with lending platform gathers data about small numerous successful fintech businesses (e.g., the business customers, including bank account data, popular “Venmo” application). According to Visa, payment processing data, shipping data, credit the acquisition of Plaid presents an opportunity card transaction data and accounting information. for Visa to use its reputation and recognition in the marketplace to grow Plaid’s payment Special Consideration for Payments capabilities and further develop Visa’s relationships with fintech companies in the Companies M&A Transactions future.3 The Plaid transaction was regarded as Payments company M&A transactions present a one of the most successful fintech exits to date.4 number of issues unique to this fintech asset Mastercard/Finicity: In June 2020, Mastercard class. Special attention should be paid to the agreed to buy a financial data aggregator, following considerations: (1) the complex and Finicity, for $825 million plus up to $160 million in often competing regulatory framework for earn-out payments if certain performance targets payments companies, including state and federal are met. According to Mastercard, Finicity will banking regulations as well as state money bolster Mastercard’s open banking services in transmission laws; (2) valuation issues and the North America and provide one-stop shopping desirability of earn-out structures; (3) conditions for their customers’ data, payment and open to closing and consents needed in the payments banking needs.5 Finicity’s online platform will give space; and (4) technology and key contract customers the ability to allow their banking diligence issues. partners to make scheduled payments on their behalf and provide advice on money Regulatory Overlay for Transactions management. As with the Visa/Plaid deal, this Involving Payments Company deal highlights the importance of payments infrastructure for large financial institutions Payments companies are subject to a complex embracing fintech solutions. regulatory framework, at both the state and federal level. These regulations are in addition to American Express/Kabbage: In August 2020, a financial institution’s compliance obligations American Express announced that it had agreed under banking laws related to M&A transactions. to acquire substantially all of the assets of the When considering a payments company fintech lender, Kabbage. According to American transaction, the buyer should diligence the seller’s Express, Kabbage’s technology, products and compliance with its regulatory obligations sooner people will allow American Express to offer a rather than later in the transaction lifecycle. broader set of cash flow management tools and 2 Mayer Brown | M&A in the Payments Sector: Key Legal, Regulatory and Contractual Considerations STATE MONEY TRANSMITTER LICENSURE pursue this option, then the buyer should REQUIREMENTS consider requiring the payments company to At the state level, payments companies (and finalize the third-party partnership as a condition many other types of fintech companies that to closing. provide payments functionality as an embedded payment solution) may be subject to money ONGOING COMPLIANCE OBLIGATIONS FOR transmission laws in 49 states and the District of STATE LICENSED MONEY TRANSMITTERS Columbia.7 Generally speaking, state money If the payments company is a licensed money transmission laws regulate receiving money for transmitter, the company will be subject to transmission or transmitting the same; however, ongoing compliance obligations under state the exact scope of regulated activity varies money transmission laws. The ongoing among states.8 Consequently, a payments compliance obligations may vary by state; company and its potential buyer should evaluate however, most states impose compliance the money transmission laws in 50 jurisdictions (in obligations related to the transmitter’s net worth addition to federal laws) to determine whether and national outstandings. First, a licensed money the payments company is operating in transmitter must hold a tangible net worth in an compliance with state money transmission laws.9 amount specified either by statute or the state regulator. Second, nearly every state money If a payments company does not hold transmission law requires a licensee to at all times appropriate money transmitter licenses, the buyer hold “permissible investments”10 at least equal to should consider structuring the transaction so the licensee’s “national outstandings.” A licensee’s that the company’s licensure obligations are outstandings are all money received for satisfied prior to closing. As an initial step, the transmission by the licensee or its agents that has parties should evaluate whether the payments not yet been paid to the recipient or refunded to company’s business model is viable once a the sender.11 money transmitter license is obtained and whether the company must amend its practices to Only certain types of assets qualify as permissible comply with the state’s requirements to obtain investments.12 They include cash, US bank and maintain a money transmitter license. deposits and certain types of highly-rated Assuming the buyer determines the business securities.13 A licensee must hold permissible model will continue to be viable when operating investments free from any lien, encumbrance or as a licensed money transmitter, then the buyer security interest.14 As a result, any security interest should consider requiring the payments company that a licensee grants that potentially could cover to obtain all necessary state licenses as a assets that the licensee counts as permissible condition to closing. However, the buyer should investments (such as a blanket security interest in bear in mind that the licensing process can be all the licensee’s assets) must carve out assets lengthy and costly. Another